Private banks more attractive than PSBs: PPFAS Mutual Fund

Private banks are one of the last sectors that still has regulatory hurdles and two thirds of the market is with public sector banks, which are undergoing asset quality issues. This makes private banks attractive over long term, said Rajeev Thakkar, CIO and Director of PPFAS Mutual Fund. Thakkar’s other picks include Mahindra Holidays, which is an asset light model as compared to its contemporaries. There is a duo play in the sector with Mahindra Holidays and Sterling, he said. Below is the verbatim transcript of Rajeev Thakkar’s interview to Sonia Shenoy & Anuj Singhal on CNBC-TV18.Anuj: I was just looking at your fund which has outperformed the benchmark. You have a lot of exposure to private banks. Do you think this is a good buying opportunity, we have seen a bit of a correction in some of the leading stocks?A: We have been positive on private sector banks for a while now. Essentially, this is one of the last remaining sectors where there are still entry hurdles in India meaning Reserve Bank of India (RBI) has this licensing and it is not easy to set up a new bank. We still have a situation where about two-thirds of the market is still with PSU banks. PSU banks are going through their own turmoil in terms of bad asset and capital constraints. On a longer term basis we have been positive on this space and we continue to own the stocks that we have. Sonia: Very interesting the kind of picks that you have in your long term value fund. Two of them are interesting Maharashtra Scooters and Balkrishna Industries is being well documented but what is the story with Maharashtra Scooters and how does the outlook for this sector look?A: Essentially there are two ways that one can play the Bajaj Group, meaning Bajaj Auto, Bajaj Finserv and Bajaj Finance. One can directly own these stocks or one can buy into the holding companies where you get the stock at about 50 percent discount. Now historically in India holding companies have been trading at large discounts like 50 percent given that governance in some groups has not been that great. However, in the Bajaj Group it has been a well-run group and given the new companies act where a lot of restrictions are placed on capital diversion and things like that and minority shareholders have to vote on the related party transactions we feel that the holding companies offer a better route to own the underlying companies. Essentially, it is investment in Bajaj Finserv, Bajaj Finance and Bajaj Auto at a 50 percent discount.Anuj: In your portfolio, one name which stands out is Noida Toll Bridge. We saw recently what happened with the High Court order, are you saying invested or do you think it is a bit of a body blow for the company now?A: We put out a statement to our unit holders we have completed exited the stock; this was post High Court decision. We do not own it as on date. Anuj: The other interesting stock in your portfolio is Mahindra Holidays; that is also niche sector but why do you like this stock?A: Essentially it is a play on the business model unlike the other hospitality stocks where the shareholders and lenders have to fund the land purchase, the property construction and so on and then wait for guests to arrive. In this business model, in the time share model, members pay the money upfront and commit to 25 years of holidays and those funds are used to construct the properties. So, it is an asset light model in that sense and given the fact that there are only two players, Mahindra Holidays and Sterling which is now owned by Thomas Cook, it is sort of a duopoly play in the country. Again, there is an element of network effect, meaning if someone has 30-40 resorts, it becomes difficult for a new entrant to come in the same space and compete fiercely. Sonia: The entire rating agency space has done exceptionally well. Crisil has been a long-term favourite of many veterans. However, within this space, Icra is something that you like. A: In the past we have owned both Crisil and Icra. Crisil we had exited sometime back and Icra is what we continue to hold. The stock price has run up quite a bit post Moody’s acquisition and to an extent based on historical earnings, it is a bit expensive as on date. However, essentially given the fact that Reserve Bank of India (RBI) is nudging the large corporates to move towards traded instruments rather than depend only on bank lending, that is a positive in the future. Also given that it is a Moody’s subsidiary now, you could see some business coming their way. So, these are the things that we are looking out for.Anuj: Some of the gas stocks have done well for you, Indraprastha Gas (IGL), Gujarat Gas Company is this a space that you think will remain in a bull market for a long period?A: We have seen this pressure on municipal corporations and on the governments as to how to really reduce pollution in our cities. Delhi has this big problem we have seen the smog kind of situation and some car crashes and so on. So, this entire move from diesel towards CNG and also the move towards pipe gas for residential premises that is a ongoing move. In their areas of operation these are monopoly players. From that point of view it looks interesting and positive. One has to also watch out for the regulatory actions and what happens in the future in terms of introducing open access or a regulation of tariffs in some form.